Fannie Mae Faces Huge Hurdle
as OFHEO Report Nears

Expected to Pay Fine Of Several
Hundred-Million Dollars:
Ofheo Finds That Officials Fostered Arrogant Culture
And a Disregard for Rules

KRISTIN ROBERTS & LYNN ADLER /
Reuters 22may2006

WASHINGTON/NEW YORK — Fannie Mae faces the most comprehensive and
potentially damaging report on its multibillion-dollar accounting problems this
week when its U.S. regulator releases findings from a nearly three-year probe.

The U.S. Office of Federal Housing Enterprise Oversight, or OFHEO,
is due to release results of its special examination on Tuesday morning.

That report, long awaited in Washington and on Wall Street, could reignite
efforts on Capitol Hill to overhaul supervision of the mortgage finance giant
and, in the process, restrict its business activities.

Information revealed by OFHEO also could be used by other agencies, including
the Justice Department, investigating one of the biggest accounting scandals in
U.S. corporate history.

While many Washington sources have speculated the OFHEO report will not
reveal new, material accounting errors, it could come down hard on some Fannie
Mae <FNM.N> officials.

Some said OFHEO may spread blame more widely than a previous report from the
investigator hired by Fannie's board that cleared current management of any
significant role in the debacle and said the board was given misleading or
incomplete information.

That investigation, led by former U.S. Sen. Warren Rudman, also did not find
that Fannie's former Chief Executive Officer Franklin Raines knew the company's
accounting departed from generally accepted practices in significant ways.

Fannie Mae last week said OFHEO had asked the company to review the draft
report.

Days later, Fannie Mae said long-time board member Thomas Gerrity would step
down immediately as chairman of the board's audit committee and leave the board
by the end of 2006. The company would not say if that was related to OFHEO's
findings.

"The company appears to be undertaking a strategy to anticipate concerns
likely to be raised in the OFHEO report on Fannie's accounting problems,"
said Howard Glaser, mortgage industry consultant in Washington and former senior
housing official in the Clinton administration.

"The actions signal that the company has a game plan to address
regulatory issues, and won't simply react to regulatory findings as a corporate
piata."

Fannie Mae on Monday said it had no comment on the report or whether
executives had completed reviewing the draft.

MARKET FOCUS

Fannie has disclosed a host of accounting errors expected to lead to a profit
restatement of as much as $11 billion.

Chief Executive Officer Daniel Mudd told Reuters he believed all the major
problems with the largest dollar-impact on the total profit restatement had
already been found.

Wall Street analysts say they would be surprised if the OFHEO report
identified significant new problems. Even if it does, it will eliminate much of
the uncertainty that has hovered around Fannie Mae.

"Even if there's a bomb in there, there will be a sigh of relief that
it's done," said Ed Groshans, an analyst at Fox-Pitt, Kelton.

The report may move Fannie's stock price, which is down about 12 percent over
the past year, but it is unlikely to impact bondholders unless it clearly offers
Congress the ammunition needed to get a bill moving again, analysts said.

Legislation to create a new regulator for Fannie and its sibling
government-sponsored enterprise Freddie Mac <FRE.N> has stalled in the
Senate where Republicans and Democrats have been unable to forge compromise on
the most controversial provision related to the companies' $1.4 trillion
investment portfolios.

Those portfolios have become the heart of the debate.

The House of Representatives passed a bill that would give a regulator the
authority to order Fannie and Freddie to reduce those holdings of mortgages and
securities. But the White House and Federal Reserve said that did not go far
enough.

They argue the portfolios pose a risk to the financial system by aggregating
interest rate risk within two companies and requiring complicated hedging
arrangements.

Instead, the Fed and U.S. Treasury Department support a Senate bill that
would force portfolio cuts by restricting the kind of assets Fannie and Freddie
could hold. That bill has not advanced beyond the Senate Banking Committee.

The bond market, analysts said, is unlikely to flinch until Congress pushes
ahead.

"It would take a substantial change in legislation, I would think —
something that affects the portfolio size, something that increases the capital
requirements substantially and limits their non-guarantee business," said
Lance Pan, credit research director at Capital Advisors Group in Newton,
Massachusetts.

Fannie Mae Is Expected to Pay Fine
Of Several Hundred-Million Dollars

Ofheo Finds That Officials Fostered Arrogant Culture
And a Disregard for Rules

JAMES R. HAGERTY and JOHN D. MCKINNON / Wall Street Journal
22may2006

WASHINGTON — Federal regulators are expected to announce Tuesday a
settlement under which Fannie Mae will pay a fine of several hundred-million
dollars for allegedly manipulating accounting rules in ways that helped boost
bonuses for executives.

The expected settlement with the Securities and Exchange Commission and the
Office of Federal Housing Enterprise Oversight, or Ofheo, will come with a
report from Ofheo blaming Fannie's board and top executives for fostering a
culture that allowed managers to disregard accounting rules and manipulate
earnings.

Representatives of Fannie Mae, Ofheo and the SEC all declined to comment.

In December 2003, Ofheo imposed a fine of $125 million on Freddie Mac, Fannie
Mae's smaller rival in providing funding for home mortgages, for a series of
accounting violations aimed at smoothing earnings.

The long-awaited report from Ofheo is due to be released Tuesday. The report
concludes that Fannie executives manipulated earnings to meet exact earnings
targets and help boost bonuses for several years, according to people familiar
with the report. Ofheo found that Fannie was infected by a belief that
"we're smarter than anyone else," said another person who reviewed the
document. The company failed to invest in computer systems and expertise to
ensure that it could comply with accounting rules and keep its books accurate,
this person said.

The report also is expected to recommend further reviews of some of the
executives criticized.

Fannie has acknowledged that it violated more than a dozen accounting rules
as part of what Ofheo has said was an attempt to keep earnings on a steady
upward climb rather than showing ups and downs that might have upset Wall
Street.

Fannie Mae Replacing Chairman of Board's Audit Committee

MARCY GORDON / AP 20may2006

WASHINGTON - Mortgage giant Fannie Mae said Friday that it was replacing the
chairman of its board's audit committee, a key position as the company struggles
to emerge from an $11 billion accounting scandal. The announcement by Fannie Mae
that the board had named accounting professor Dennis Beresford to replace audit
committee chairman Thomas Gerrity came a few days before federal regulators are
scheduled to release a major report on their extensive examination of the
government-sponsored company. The report due out Tuesday is widely expected to
be sharply critical of Washington-based Fannie Mae, and the role of its board of
directors in the accounting debacle is expected to be touched on.

Gerrity also will step down as a director, the company said.

The regulators, in the Office of Federal Housing Enterprise Oversight, in
September 2004 accused Fannie Mae of serious accounting problems and earnings
manipulation to meet Wall Street targets. The Securities and Exchange Commission
subsequently ordered the company to restate earnings back to 2001 - a correction
expected to reach an estimated $11 billion. The Justice Department is pursuing a
criminal investigation.

Fannie Mae, which finances or guarantees one of every five home loans in the
United States, disclosed earlier this month that its government-ordered review
had turned up additional accounting errors. The company hasn't filed an earnings
report since late 2004.

In its announcement Friday, Fannie Mae said it was Gerrity's decision to
relinquish at this time the position he has held since 1999 as head of the audit
panel.

"Over the past two years, Tom has indicated that, ... following the
board's corporate governance policies, this is the right moment to step down and
allow the board to bring on new leadership talent and energy to guide the audit
committee forward," Fannie Mae Chairman Stephen Ashley said in a statement.
"We accept his choice and decision."

Gerrity, a former dean of the Wharton business school at the University of
Pennsylvania, joined the Fannie Mae board in 1991. He also previously was the
president of CSC Consulting, a vice president of Computer Sciences Corp., and
chairman and CEO of Index Group Inc.

Beresford, a former chairman of the Financial Accounting Standards Board,
teaches accounting at the University of Georgia in Athens. He also heads the
audit committees at Kimberly-Clark Corp. and Legg Mason Inc.

A company-ordered report released in February detailed a breakdown in
financial controls and found an arrogant corporate culture at Fannie Mae. It
said the company's former finance chief and controller share responsibility for
the accounting failures.

Fannie Mae and its smaller rival Freddie Mac were created by Congress to pump
money into the $8 trillion home-mortgage market to keep interest rates low. They
buy and guarantee repayment of billions of dollars of home loans each year from
banks and other lenders, then bunch them together into securities that are
resold to investors worldwide.

source: http://www.dailynews.com/business/ci_3844510
22may2006

Fannie Mae Expected to Pay Large Fine

MARCY GORDON / AP 22may2006

WASHINGTON — Embattled mortgage giant Fannie Mae is expected to be fined
several hundred million dollars over the alleged manipulation of accounting so
that executives could collect millions in bonuses, in a settlement to be
announced Tuesday.

The deal with the Office of Federal Housing Enterprise Oversight and the
Securities and Exchange Commission comes as the government-sponsored company
struggles to emerge from an $11 billion accounting scandal. The housing
oversight agency is scheduled on Tuesday to issue the results of its extensive
investigation of Fannie Mae, an assessment that is widely expected to be sharply
critical and to touch on areas not addressed in a previous report ordered by the
company's board of directors.

Those areas include the role of Fannie Mae's board and some executives still
at the company in the accounting debacle, according to two individuals familiar
with the report, who spoke Monday on condition of anonymity because it had not
yet been made public. The regulators are expected to recommend that the company
review the executives' actions with an eye to possibly firing or disciplining
them, they said.

One of the individuals confirmed the anticipated fine against
Washington-based Fannie Mae, which was first reported Monday evening by The Wall
Street Journal Online.

According to regulators, Fannie Mae in 1998 improperly put off accounting for
$200 million in expenses to future periods so executives could collect $27
million in bonuses.

Documents cited in a report released earlier this year show that top-level
management was focused on the $200 million deferral and meeting earnings targets
that would trigger the payment of full bonuses.

Press Release / Fannie Mae 19may2006

WASHINGTON, May 19 /PRNewswire-FirstCall/ — Fannie Mae (NYSE: FNM) today
announced that the Board of Directors has elected Dennis R. Beresford to join
the Board and become Chairman of the Board's Audit Committee. The company also
announced that Thomas P. Gerrity, a Board director since 1991, would be stepping
down as Audit Committee Chairman and member, and would be leaving the Board by
the end of 2006.

"We welcome Dennis Beresford to our Board and to Fannie Mae," said
Stephen B. Ashley, Chairman of the Board. "Denny's significant financial
accounting and board experience will provide valuable expertise to Fannie Mae's
Board and its Audit Committee as the company works toward completion of our
financial restatement and return to timely filings, and completes building its
new finance, controller's, audit and compliance organizations."

Beresford joins Fannie Mae's Board with an extensive and successful career in
accounting. From 1961 to 1986, he was with Ernst & Young LLP, including ten
years as a senior partner and national director of accounting. From 1987 to
1997, Beresford served as Chairman of the Financial Accounting Standards Board (FASB),
the designated organization in the private sector for establishing standards of
financial accounting and reporting. Currently, Beresford is Ernst & Young
Executive Professor of Accounting in the J.M. Tull School of Accounting at the
University of Georgia in Athens, teaching in the MBA and Masters of Accountancy
programs. He also currently is a member of the Board of Directors and Chairman
of the Audit Committee of Kimberly-Clark Corporation and Legg Mason, Inc.

Gerrity, who has served as Chairman of the Board's Audit Committee since
1999, has been professor of management since 1990 and was dean from June 1990 to
July 1999 of The Wharton School of the University of Pennsylvania. He was
president of CSC Consulting and vice president of Computer Sciences Corporation
from May 1989 to June 1990 and chairman and chief executive officer of Index
Group, Inc., from March 1969 to April 1989.

"Tom Gerrity has played a critical role over the past 18 months as
Chairman of the Audit Committee in the progress the company has made in
improving its internal audit department, bringing on board a new external audit
firm, and making strides forward in the restatement process," Ashley said.
"Over the past two years, Tom has indicated that, after 15 years of service
to the Board and following the Board's corporate governance policies, this is
the right moment to step down and allow the Board to bring on new leadership
talent and energy to guide the Audit Committee forward. We accept his choice and
decision, and express our deep gratitude for his service and counsel."

Fannie Mae is a New York Stock Exchange Company. It operates pursuant to a
federal charter. Fannie Mae has pledged through its American Dream Commitment to
expand access to homeownership for millions of first-time home buyers; help
raise the minority homeownership rate to 55 percent; make homeownership and
rental housing a success for millions of families at risk of losing their homes;
and expand the supply of affordable housing where it is needed most. More
information about Fannie Mae can be found on the Internet at http://www.fanniemae.com/.